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Bernanke: Economy on Pace for '09 Turnaround

The pace of economic contraction is slowing, indicating the economy could bottom out and then turn up later this year, Federal Reserve Chairman Ben S. Bernanke told the House Budget Committee on June 3. He cited recent reports, including a flattening out of the decline in consumer spending and signs of a bottom in the housing market.

Bernanke said the economy "has contracted sharply since last fall, with real gross domestic product (GDP) having dropped at an average annual rate of about 6% during the fourth quarter of 2008 and the first quarter of this year," Bernanke told the committee. He said 6 million jobs have been lost since the downturn began, and recent labor market information "suggests that sizable jobs losses and further increases in unemployment are likely over the next few months."

Bernanke said consumer spending, which dropped sharply in the second half of 2008, has been "roughly flat" so far in 2009, and "consumer sentiment has improved." He also said the Obama Administration's economic stimulus could boost spending. However, the Fed chairman said a weak job market, the loss of housing wealth, and tight credit conditions could hamper consumer spending, which would be a key component of any recovery.

"Making Progress"

The Fed chairman said businesses "remain very cautious and continue to reduce their workforces and capital investments. On a more positive note, firms are making progress in shedding the unwanted inventories that they accumulated following last fall's sharp downturn in sales."

Bernanke said the Fed continues to believe economic activity will turn up later this year, based on improvments in consumer spending and housing demand supported by fiscal and monetary stimulus and stabilization in foreign economic activity. Inflation is likely to remain low over the next year, Bernanke said.

However, he warned that the forecast is dependent on continuing improvement in credit markets, and he said that "even after a recovery gets under way, the rate of growth of real economic activity is likely to remain below its longer-run potential for a while, with unemployment continuing to rise even after the economy turns around.

Concerns about the job market were heightened by Wednesday's release of the ADP National Employment Report. The private sector report, which has become more closely watched in recent months, said employment decreased by 532,000 in May, vs. a revised decline of 545,000 jobs in April.

While the ADP report showed a slight improvement, it was "another in a list of 'less bad' economic reports," said Alan Gayle, senior investment strategist at RidgeWorth Capital Management. "We do believe that the market expectations are shifting from simple survival to sustainability, so less bad is not good enough."